Egyptian economy growing out of vulnerability, moving into recovery: HC Securities and Investment

HC Securities and Investment assured that the reforms implemented by the Egyptian government are starting to bear fruit, but at the expense of a higher short-term debt burden. Last year, the Egyptian government adopted tight monetary and fiscal policies, managing to restore the country’s net international reserves (NIR) to pre-2011 levels.

The International Monetary Fund (IMF) third review of Egypt’s economic reform programme gave a positive outlook, provided a cautious easing cycle and more inclusive growth are pursued, said Sara Saada, chief economist at HC Brokerage.

“While we believe the current high level of local debt (97% of GDP) is a burden on the fiscal budget, we are confident in Egypt’s commitments to the reform programme and the fiscal consolidation plan. We expect a growth in GDP, which may lead to a gradual drop of the ratio of local debt to GDP,” Saada added.

However, the rise in external debt to $100bn in January from $67bn in December 2016, according to the latest announced figures, is currently a major source of vulnerability for the Egyptian economy, in HC’s view. Other external risks include the increase in global oil prices, which may jeopardise the balance between price stability and the government’s fiscal consolidation plan. Moreover, the company believes private investment growth is key to more sustainable GDP growth, in line with the IMF report. “With the ambition of more comprehensive growth, we expect a number of monetary and fiscal policy measures to be adopted by the government to stimulate private investment growth over the short term,” Saadaadded.

She also said she expects interest rates to be reduced by a total of 800 basis points (bps) throughout fiscal year (FY) 2018/2019. “We expect annual inflation to continue decelerating to an average of 13% in FY 2018/19 and 11% in FY 2019/20, which, along with a largely stable foreign exchange rate in the short term, should further improve the investment climate in Egypt and stimulate growth,” she noted.

Saada stressed that the Central Bank of Egypt (CBE)’s decisions to cut interest rates by 100 bps in both February and March were positive moves, marking the start of an easing cycle. The CBE is expected to continue easing, though at a cautious pace, as the government is not yet done with its fiscal consolidation plan, which poses inflationary risk over the short term. However, HC expects the easing cycle to be rational and to take a long time.

“Given the lagged effect of policy rate movements on inflation and the possible rise in monthly inflation ahead of Ramadan and the partial lifting of energy subsidies in July, we believe the CBE will not cut rates further in the second and third quarters of 2018, and to proceed with easing in the fourth quarter in 2018. That said, we do not see the easing cycle posing capital flight or currency devaluation risks given the strong reported external position figures,” Saada stated.

The growth in GDP in the first half of fiscal year 2017/2018 to 5.23% from 3.83% in the same period of last year creates expectations that GDP will reach 5.3% in FY 2017/2018 before reaching 6% in FY 2018/2019, and then 6.2% in FY 2019/2020, Saada said.

HC believes that the government will continue to press ahead with its fiscal consolidation efforts despite a short-term inflationary impact, as these reforms are crucial for long‐term price stability. The government has also adopted a comprehensive fiscal reform programme, targeting a primary surplus of 1.8–2.0% next fiscal year, largely in line with HC’s expectations, with that figure set to increase to 3.1% in FY 2019/2020.

This is based on HC’s estimates of tax revenues to GDP, which is expected to rise from 13.3% last year to 14.2% in FY 2017/2018, 14.7% in FY 2018/2019, and to 15.2% in FY 2019/2020. Expenses excluding interest should drop as a percentage of GDP to 18% this fiscal year, while it is expected to drop to 17% the next fiscal year, and then drop to 16% the year after, from 21% last fiscal year, based on HC’s numbers.

“Moreover, we expect the government’s planned three-year partial asset sale programme to positively influence the overall deficit over the short term, with the bulk of the asset sale to be realised in FY 2018/2019, in our view. We therefore expect an overall budget deficit-to-GDP of 10.1% in the current fiscal year, 8.4% in FY 2018/2019, and 7.1% in FY 2019/2020,” Saada added.